COVID-19: Three steps to navigate turbulent times
The response to the coronavirus (COVID-19) pandemic is evolving quickly and at this time we don’t know how long the crisis will last. In the initial few weeks businesses have concentrated on protecting employees and maintaining their supply chain, and rightly so. But as events continue to unfold the operational, financial and liquidity challenges continue to mount for businesses in many sectors.
There’s no doubt that the weeks and months ahead are going to be challenging and the priority now for business leaders is ensuring their company can ride out the impact. Here are three critical steps that will help businesses stabilise their cash position and shore up their defences:
Understand your current financial position and assess available and trapped cash
Understanding available cash,and identifying any opportunities to release trapped cash is critical for companies caught up in the current crisis. Preparation of a short-term (13 week) cash flow forecast is key and this should be reviewed regularly to ensure it reflects the most recent financial position. This should be supplemented with updated business plans, budgets and forecasts, which will help you understand the potential short and medium term financial implications from a liquidity and covenant perspective.
The cash position should be stress tested by identifying a range of potential scenarios and performing sensitivity analysis to understand the magnitude of financial implications in each scenario.The potential impact of shifting exchange rates on the cash position should also be considered as this could have a significant impact on liquidity if a business has a large global presence.
Ensuring that you have the right reporting tools and systems in place that allow for real-time reporting across multiple locations will be hugely beneficial.If current systems don’t allow for this, assess the limitations and understand where the likely ‘blind spots’ will be so steps can be taken to mitigate or separately factor the ‘blind spots’ into the decision-making process.
Protect your position
Once a business has clarity of the cash position, directors and management teams can take immediate action to maintain the position and identify any opportunities to access new money, if required. Some organisations have appointed a Chief Restructuring Officer ‘CRO’ or Turnaround Director with specific responsibility for maintaining the cash position and managing the business through a restructure
Rapid optimisation of working capital to preserve liquidity should be the next area of focus. Management should explore the options available to the business for new additional funding and capital, as well as understanding the flexibility of existing funding agreements. The following should be considered as part of the next steps:
- Does finance documentation allow for flexibility on covenants, or access to equity cures or force majeure provisions?
- Is there opportunity to access additional borrowing capacity from new providers and/or by leveraging unencumbered assets (including intellectual property, inventory or receivables)?
- Does the business have the scope to access government funding initiatives?
- Is equity release an option? Or disposal of underperforming parts of the business?;
- Where can costs be cut? Can any stock be liquidated?
- Is there flexibility in key supplier and customer contracts to amend payment and pricing terms (on both sides)
- Do insurance policies have business interruption clauses
- What operational contingency plans do you have in place to minimise disruption to the business, including reviewing the people who are authorised to manage bank and systems processes and controls?
- Has your resource planning been updated to assume staff absences?
Manage internal and external stakeholders
Successfully navigating the COVID-19 crisis isn’t just about decisive action - clear and consistent communication with internal and external stakeholders is critical during times like this:
- Identify key external stakeholders, engage with them early and be proactive in managing them and the situation. Consider how they might react as events unfold
- Understand what information shareholders, pension trustees, regulators, credit insurers, credit card companies etc need to know
- Develop a clear communication plan to ensure consistent messaging across all channels.
- Consult with internal risk and marketing teams?
For more guidance around responding to this rapidly evolving situation please visit our ‘Responding to the UK business impacts of COVID-19’ page. If you have any immediate questions, please get in touch.
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